We are economists writing about economics: Karl Smith, an assistant professor of economics and government at the School of Government at the University of North Carolina; and Adam Ozimek, an associate at an economics consulting firm. As most in our profession are eager to tell you, economics includes just about everything, so we'll be blogging -- with varying degrees of success -- about the economy, markets, politics, science, technology, philosophy and culture. We both come from a similarly vague libertarian ideological perspective, but we've been called neoliberal as well, and idiosyncratic might be the best adjective to use.

Doubling McDonald's Salaries A Great Way To Get Workers Replaced By Machines

A recent article at the Huffington Post makes the claim that if McDonald'sMcDonald's doubled its employees salaries it would only cause the price of a Big Mac to go up by 68 cents. The implication here is that 68 cents isn’t much money, so they should do it. There’s a few things missing from this. One is that the article itself alleges that doubling wages would lead to a 17% increase in costs. And I guess this is obviously supposed to seem like a small amount? It doesn’t look that way to me. What do people expect will happen when prices go up 17%? If McDonald’s could raise its prices by that much without lowering demand they would. No, what would happen is people would shop at those stores less, there would be less profit and less McDonald’s stores to hire workers.

You may have the impression from reports on the minimum wage literature that wages and employment aren’t related, and that there is no such thing as labor demand. Unfortunately I think this isn’t an unreasonable impression to take from much of the discussion, but it is in fact incorrect. You’d be hard pressed to find labor economists who think that if McDonald’s had to pay double wages there wouldn’t be a disemployment effect at McDonald’s stores. For one thing there is a difference between wages being artificially pushed up across an entire state’s labor market by the minimum wage and wages being pushed up artificially at an individual firm. So long as McDonald’s acted alone, people would shift some purchases to other fast food chains. In addition, while some economists doubt that the labor demand curve matters for small changes in wages I can promise you they all thing it matters at some point. And doubling of salaries is a big change.

Most importantly perhaps is what this does to McDonald’s incentives. We’re hearing more and more about machines replacing workers and there are some obvious contenders for replacement within a McDonald’s. Have you ever been to a SheetzSheetz or WawaWawa? As you can see in the picture below, they have ordering screens that allow you to place orders without speaking to anyone. It’s not hard to imagine McDonald’s switching to a system like this for credit card orders.

Source: Flickr user Adam Gerard

And that’s just the most obvious way for machines to replace workers. One company called Momentum Machines is already working on robots to replace the cooks too. The company claims that their machine “replaces all of the hamburger line cooks in a restaurant”. They even cite the importance of labor costs in deciding to switch to their technology:

An average quick service restaurant spends $135k every year on labor for the production of hamburgers. Not only does our machine eliminate nearly all of that cost, it also obviates the associated management headaches.

Doubling of labor costs will simply increase a fast food restaurant’s incentives to adopt technology like this. And if fast food wages doubled everywhere it would spur the development of these technologies even faster.

In the long-run such technological change makes us better off on average, as defenders of minimum wages and other labor market regulations will often point out as a counterpoint here. But individual instances of this change can create winners and losers, and it seems clear that those pushing for higher fast food wages are concerned about many of those workers who would are at risk of being losers in this particular change. In addition, the process of labor being replaced by technology is efficient when it represents real cost minimization. You can be an optimist about the welfare effects of efficient technological change without being an optimist about the welfare effects of labor market regulations that lead firms to innovate around them.

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